LTV

What is a private mortgage you ask? A private mortgage is a loan provided by individuals who wish to gain a higher return on their investment focused funds in comparison to depositing their money into a regular savings bank account, or an investment type of an account with low yields. A private mortgage is secured against the property that the borrower has requested the private mortgage for.

Private mortgages can be an accumulation of a large number of investors who have pooled their personal or business / investment related funds into a trust account, or single individuals with enough of their own money. These funds are managed by a mortgage brokerage company or a company solely created for the reason of lending out private funds for the purpose of real estate financing.

To get approved for a private mortgage is not as difficult as to get approved for a mortgage from a lender such as the chartered banks; there are less restrictions in comparison to the other extreme, which are the chartered banks that require detailed information from the borrower, such as employment / source of income, proof of down payment, and a healthy and strong credit score with no recent credit issues. In comparison, the most important item that a private lender looks at is the property that is being purchased; where is it located, what is its condition, and can it be sold if the borrower defaults on their mortgage payments and the private lender has to foreclose and sell the property.

A private mortgage comes with a much higher interest rate and there is a onetime lender fee that must be paid by the borrower of the private mortgage. Normally what happens is that the borrower cannot be approved for a regular mortgage from a bank or the other specialty mortgage lenders, and what is left is a private mortgage. These types of mortgages are contracted to be paid in full in a short period of time, such as one year or less, and they are used many times as a second mortgage to cover up the difference of the down payment that the borrower does not have.

For example, the borrower does not get approved by one of the big banks in Canada, and his or her mortgage broker or agent will take their client to the next available option, which are what we call the ‘B’ lenders who deal with special case scenarios, such as those who have had previous bankruptcy’s, self-employed individuals who can’t prove their income, those with bad credit, …etc. You get the picture. The ‘B’ lenders will potentially give the client a mortgage loan no more than 80 – 85% of the real estate value; otherwise known as LTV Loan To Value. That means if the borrower does not have enough of the remainder of the funds in the form of a down payment, then they are left with trying to get a private lender to give them a private 2nd mortgage which would cover part of the down payment and the borrower would provide the rest of it. No lender would ever go up to 100% financing on these special case scenario types of deals. Therefore, the 1st mortgage lender will go up to a maximum of 80 – 85%, then they will stipulate in their contract that the borrower can get a 2nd mortgage up to an additional 5 – 10% and the rest the borrower will have to provide from his or her own resources.

Pros

– Quick money

– Straight forward approval process

– Look at the property more than the applicant

Cons

– High interest rates

– Lender fees

– Short term borrowing solution; paid back usually by one year or less

– Because it’s short term, at the end you have to refinance mortgage to pay back the 2nd mortgage and costs occur again in a short period of time